PLANO, Texas - The boardroom drama may be over, but J.C. Penney (
NYSE:JCP,
Stock Forum) is still grappling with an uncertain future.
William Ackman has resigned from J.C. Penney's board as part of a deal to resolve an unusually public battle between the activist investor and the struggling department store operator.
Ackman's departure could provide some relief from a battle that became a distraction while Penney has been working to fix its ailing business. But investors pushed shares down in morning trading as they focused on Penney's long-term struggle to turn business around.
The decline also reflected worries that Ackman might sell shares. Ackman's Pershing Square Capital Management is Penney's biggest stockholder and owns 17.7 per cent stake or about 39 million shares. CNBC quoted Ackman as saying that he had no immediate plans to sell.
Ackman went public last week with statements saying he'd lost confidence in Penney's board and that Chairman Thomas Engibous should be replaced. Ackman and the retailer's board also were bickering over how quickly the company should replace CEO Mike Ullman.
On Tuesday, Penney named Ronald Tysoe as a director to fill Ackman's seat. Tysoe is former vice chairman of Federated Department Stores Inc., which is now Macy's Inc. (
NYSE:M,Stock Forum) Penney will name an additional new director in the near future.
Ackman said in a statement that the moves were “the most constructive way forward” for the Plano, Texas, company and all parties involved.
The departure doesn't do much to reverse Penney's declining business, which is trying to lure back shoppers turned off by a reinvention plan formulated by a former CEO backed by Ackman.
“This was just a sideshow,” said Brian Sozzi, chief equities strategist for Belus Capital Advisors. “The fundamental issues of the company are nowhere near fixed.”
In a note to clients published Tuesday, Michael Binetti, an analyst at UBS Investment Research, wrote that the “fundamental outlook remains concerning.” That leaves UBS unsure of who would buy the 39 million shares or “at what price the stock would change hands.”
“Pershing's potential sale is likely to remain a significant stock overhang” in the near term, Binetti wrote.
Penney's board also made it clear that it continues to support Ullman, who was brought back as CEO in April. Ullman had previously served as Penney CEO from 2004 to 2011.
The resolution caps several days of boardroom drama where Ackman went public with two scathing letters to the board. In them, he noted that the board has “ceased to function effectively.” He also questioned the board's hiring and firing practices and “aggressive” inventory purchases.
Engibous fired back in a pair of releases saying that Ackman's comments were “misleading, inaccurate and counterproductive.”
The boardroom brawl even had Howard Schultz, Starbucks (
NASDAQ:SBUX,
Stock Forum) founder and CEO, weigh in. He sided with Ullman and called Ackman's actions “disgusting.” Schultz is not a Penney shareholder, but Ullman sits on Starbucks' board.
Ullman had replaced Ron Johnson, who was ousted as CEO after 17 months because his radical makeover led to massive losses and sales declines.
Ackman joined Penney's board in February 2011 after pushing for a seat, and was the one who pushed the board to hire Johnson, a mastermind of Apple Inc.'s successful stores, as someone who could inject new energy into a tired company.
Ackman was seen glowing in late January 2012 as Johnson presented his reinvention plan to an audience of analysts, investors and big name designers including Ralph Lauren (
NYSE:RL,Stock Forum) and Calvin Klein. The plan called for the elimination of most discounts in favour of “every day” lower prices. Johnson also wanted to carve Penney into mini-shops devoted to brands or types of merchandise.
The new pricing plan started Feb. 1, 2012, and was an instant disaster. Sales plummeted, and so did investor confidence.
Penney amassed nearly a billion dollars in losses and its revenue dropped 25 per cent for the fiscal year that ended Feb. 2 in the first year of the failed transformation strategy. The trend continued into the first quarter, as Johnson's legacy remained. Ackman remained Johnson's supporter until weeks before he was fired.
Since coming back to Penney in April, Ullman has worked to stabilize the business by bringing back basic merchandise and more frequent sales eliminated by Johnson in a bid to attract younger, hipper customers. But many analysts believe that while traffic is improving, there has been no evidence of a turnaround yet as the company heads into the home stretch of the critical back-to-school shopping period.
There are also increasing concerns about Penney's financial liquidity. Earlier this month the retailer said it expects to finish the second quarter with about $1.5 billion in cash on its balance sheet.
Analysts and suppliers will dissect Penney's second-quarter financial results on Aug. 20, but analysts expect the numbers to be bad. Binetti expects the company to report that revenue at stores opened at least a year fell 14 per cent from a year ago, when that measure dropped 21.7 per cent. Analysts on average expect a 7.9 per cent decline, according to FactSet.
These figures are a key indicator of a retailer's health because they exclude revenue at newly opened stores.
Michael Cipriani of Rosenthal & Rosenthal, a lender in the clothing industry, said that last week it put Penney's suppliers on a short leash, financially backing orders for Penney for just two to three weeks out. The move was intended to limit its exposure until it can see how Penney succeeds with its turnaround efforts.
Rosenthal & Rosenthal is a factor which makes cash advances to suppliers based on the goods they sell to the merchant. The decision was made based on financial information and the boardroom warfare taking place, Cipriani said.
The lender only represents 1 per cent of Penney's suppliers, but it move underscores how uneasy vendors have become. If vendors and factors become wary of a store's creditworthiness, the retailer may have to pay suppliers cash upfront for goods, which can drain cash quickly.
Walter Loeb, a New York-based retail consultant, however, says that what's important is that Penney still has support from the major suppliers.
Loeb added that the addition of Tysoe to the board will “strengthen the financial stability.” He noted that in the late 1990s, Tysoe helped Federated Department Stores come out of bankruptcy and avoid a takeover by real estate magnate Robert Campeau.
Penney's stock was down nearly 4 per cent, or 52 cents, to $12.65. The share price has fallen nearly 38 per cent since the beginning of the year and almost 70 per cent since early last year when Johnson unveiled his transformation plan to investor enthusiasm.
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